SEC Charges Investment Adviser for Overbilling Clients to Pay Personal Expenses

On May 30, 2017, the United States District Court for the Eastern District of New York entered a final consent judgment against Marc D. Broidy (“Broidy”) and his investment advisory firm, Broidy Wealth Advisors, LLC (“BWA”).  The Securities and Exchange Commission (“SEC”) had filed a complaint alleging that Broidy and BWA “intentionally overbilled clients and used the excess fees to pay for, among other things, Broidy’s personal expenses.”  The complaint also alleged that Broidy converted assets from clients’ trusts, also for the purpose of paying personal expenses.

The SEC alleged that from about February 2011 to February 2016, Broidy and BWA overbilled approximately $643,000 in connection with advisory services to five clients.  The SEC also alleged that Broidy and BWA made conscious efforts to conceal the overbilling.  BWA’s Form ADV and Investment Advisory Contracts stated that clients would typically be billed anywhere from 1 percent to 1.5 percent of their assets under management on a quarterly basis.  However, Broidy and BWA charged clients significantly more than these percentages.  To conceal the overbilling, Broidy amended the Forms 1099 that he received from the brokerage firms he used to “eliminate or decrease the advisory fees he had deducted from the accounts.”  Evidence showed that when some clients’ accountant confronted Broidy about some discrepancies between the Form 1099 that he had given the clients and the one that the brokerage firm had produced, Broidy claimed that the brokerage firm had experienced a batch error.  However, according to the SEC, evidence showed that the brokerage firm never experienced a batch error and that the fees it provided on the Form 1099 it produced were correct.

The SEC’s complaint also alleged that Broidy and BWA misappropriated assets from client trusts over which Broidy was trustee.  This too was allegedly done to pay for Broidy’s personal expenses.  The SEC claimed that Broidy assured the clients who set up the trusts that they would not be charged fees in connection for his services as trustee in addition to their advisory fees.  However, evidence showed that Broidy did in fact charge the clients for his services as trustee.  Moreover, there was evidence that Broidy told the clients that he would not sell the stock from the clients’ company that made up the corpus of the trusts.  According to the SEC’s complaint, Broidy sold approximately 155,221 shares from the trusts’ accounts for $865,000 and used the proceeds to pay for personal expenses.

Furthermore, the SEC alleged that to cover up the conversion of the trust assets, Broidy claimed that he would use the proceeds from the sales to “purchase shares that Broidy personally owned in two private companies, CableCo and JetCo.”  However, Broidy allegedly did not transfer shares of either CableCo or JetCo to the trusts.  The SEC also noted in its complaint that even if Broidy had engaged in the transactions he claimed he would engage in, it would have constituted a breach of fiduciary duty.  Broidy was one of two board members at CableCo, and he was the Chairman at JetCo.  The fact that he held such high-ranking positions at each company meant that any transactions between the companies and the trusts would have a strong possibility of a conflict of interest.

As a result, the SEC’s complaint claims that Broidy and BWA have violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and Sections 206(1) and (2) of the Investment Advisers Act of 1940, all of which prohibit employing devices, schemes, or artifices to defraud.  The District Court’s consent judgment enjoins Broidy and BWA from further violating these laws.  It also obligates Broidy and BWA to pay $1,719,464 in disgorgement.  Finally, on June 1, 2017, the SEC promulgated an administrative order barring Broidy from the securities industry.

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